Supreme Court’s judicial interpretations boost business environment

By Wang Wei and Wang Tianmeng, Co-effort Law Firm

In recent years, the Supreme Court has continued to improve the bankruptcy adjudication system and market entity revival and exit mechanism, issuing a string of measures to provide a judicial backstop for improving the business environment.

Wang Wei
Co-effort Law Firm
Senior Partner

At the end of 2018, courts around the country had established 98 liquidation and bankruptcy tribunals. At the start of this year, Shenzhen, Beijing and Shanghai successively established bankruptcy divisions. On 28 March 2019, the Supreme People’s Court issued the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of the Enterprise Bankruptcy Law of the People’s Republic of China (3) (the judicial interpretations), responding to issues that have attracted a great deal of debate and comment in practice.

The new judicial interpretations – through the clarification of such issues as the repayment sequence for loans taken out after a bankruptcy petition has been accepted, the right to know of individual creditors, the mechanism for voting at creditors’ meetings, and the authority of, and procedure for, the administrator to dispose of material property of the debtor – effectively regulate and supplement issues discovered in the past 10 years or so of implementation of the current Enterprise Bankruptcy Law, which will have a major impact on improving the business environment in China.

The following three provisions of the judicial interpretations were formulated in answer to the Doing Business Report issued by the World Bank.

Financing after acceptance of a bankruptcy petition. Article 2 of the judicial interpretations specifies that, after the acceptance of a bankruptcy petition and subject to the passing of a resolution by the creditors’ meeting, or before the holding of the first creditors’ meeting, subject to the permission of the court, the administrator or the debtor in possession may take out loans to permit the debtor to continue its operations.

Wang Tianmeng
Co-effort Law Firm
Legal Assistant

If the creditor that provided such loan claims priority over ordinary bankruptcy claims for repayment with reference to item (4) of article 42 of the Enterprise Bankruptcy Law, the court is required to uphold such a claim, unless the creditor claims priority over claims secured with specific assets of the debtor for repayment, in which case the court will reject such a claim.

Right to know of creditors. Article 10 of the judicial interpretations specifies that, subject to an obligation of confidentiality, a creditor has the right to review the debtor’s financial and business information and documentation required to participate in the bankruptcy procedure, such as the debtor property status report, creditors’ meeting resolutions, creditors’ committee resolutions, and administrator supervision reports. If the administrator refuses to provide the same without just cause, the creditor may request that the court render a decision, which the court is required to do within five days.

Disposal of material assets. Article 15 of the judicial interpretations specifies that, if the administrator is to dispose of material property of the debtor as specified in article 69 of the Enterprise Bankruptcy Law, it is required to first prepare a property administration plan or a plan to sell the property and submit it to the creditors’ meeting for a vote. If the vote fails in the creditors’ meeting, the administrator may not dispose of the property.

If the court deems that the disposal by the administrator would not be in compliance with the property administration plan, or plan to sell the property passed by the creditors meeting, it is required to order the administrator to halt the disposal. The administrator is required to rectify the matter, or submit the same anew to the creditors meeting for a vote, and proceed after the same is passed.

Premier Li Keqiang proposed “stimulating the activity of market entities and pouring efforts into improving the business environment” in the State Council’s 2019 Government Work Report. As a key soft power around which various large economic entities are competing, the term “business environment” means the external environment in which an enterprise is developing, and clearly reflects economic strength.

A key objective of improving the business environment is to stimulate market activity, thereby stimulating the entrepreneurial spirit of businessmen and women. The Doing Business Report issued by the World Bank has been deemed an investment weathervane, the importance and influence of which is becoming increasingly salient.

According to the 2019 report, China’s business environment has leapt to rank 46th among the world’s 190 economic entities, a climb of 32 spots compared with 2018, and placing it in the top 50 for the first time, becoming one of the fastest-growing economic entities.

However, in “insolvency”, one of the 10 indicators used in the World Bank’s evaluation, China shows some weakness, sliding in the ranking for three years in a row. Therefore, enhancing the bankruptcy indicator is progressively becoming the highest priority in the work of governments and courts at every level.

The judicial interpretations encourage the provision of funding support for the continued operation of debtor enterprises, and promote preservation and increase in the value of debtors’ property. With respect to enterprises that are in a debt crisis, but the rescue of which is of value, the judicial interpretations intensify the efforts at bankruptcy restructuring and bankruptcy reconciliation to give them the opportunity to continue to exist. They provide powerful judicial services and assurance for the creation of a stable, fair, transparent and predictable business environment.

Liu Guixiang, a member of the Supreme People’s Court’s adjudication committee, has stated that to establish a business environment characterized by the rule of law, it is necessary to clear away the various obstacles to factor mobility, and promote positive incentives and survival of the best. Through the strengthening of bankruptcy adjudication, the courts are to dispose of “zombie enterprises” in accordance with the law and leverage the positive effect of bankruptcy in improving the business environment and intensifying supply-side structural reforms.

Wang Wei is a senior partner and Wang Tianmeng is a legal assistant at Co-effort Law Firm


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